TASER International Inc. Q1 2008 Earnings Call Transcript

May. 9.08 | About: TASER International, (TASR)

TASER International Inc. (NASDAQ:TASR)

Q1 2008 Earnings Call

April 24, 2008 10:00 am ET

Executives

Rick Smith - CEO

Dan Behrendt - CFO

Analysts

Steve Dyer - Craig-Hallum

Paul Coster - JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 TASER International Inc. Earnings Call. My name is Carmen, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Rick Smith, CEO. Please proceed, sir.

Rick Smith

Thank you. Good morning everyone and welcome to our first conference call. At least for the first quarter of 2008. Before I get started, I am going to turn over to Dan to do the Safe Harbor.

Dan Behrendt

Thank you, Rick. Safe Harbor statements for TASER for this call are certain statements contained in this presentation maybe deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The TASER International intent is such forward-looking statements be subject to the Safe Harbor created thereby. Such forward looking statements related to expected revenue and earnings growth, estimations regarding the size of our target markets, successful penetration of law enforcement market, expansions of private sales to the private security, military, consumer, self defense markets, growth expectations for new and existing accounts, expansion of production capability, new product introductions, product safety and our business model. We caution that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein.

Such factors include but are not limited to; market acceptance of our products; establishment and expansion of our direct and indirect distribution channels; attracting and retaining the endorsement of key opinion-leaders in the law enforcement community; the level of product, technology and price competition for our products; the degree and rate of growth of the markets in which we compete, and the accompanying demand for our products; potential delays in the international and domestic orders, implementation risks of manufacturing automation, risks associated with rapid technological change; execution and implementation risks of new technology; new product introduction risks; ramping manufacturing production to meet demand; litigation resulting from alleged product-related injuries and death; media publicity concerning product uses and allegations of injury and deaths and the negative impact which could have on sales; product quality risks; potential fluctuations and quarterly operating results; competition; negative reports concerning TASER device uses; financial and budgetary constraints of prospects and customers; dependence upon sole and limited source suppliers; fluctuations in component pricing; risks of government investigations and regulations; TASER product, tests and reports; dependence on key employees; employee retention risks; and other factors detailed in the company's filings with the Securities and Exchange Commission.

And with that, I would like to turn the call back over to Rick Smith, our CEO.

Rick Smith

Alright, thanks Dan. Well, we are certainly proud of the results our team was able to turn in. It certainly has become a challenging economic environment here in the United States. In the first quarter, our revenues were up 47% over the same period last year, a record $22.5 million record for our first quarter. Income from operations was $1.6 million, up 361% over the prior year, albeit from a small base. Perhaps most significantly, our margins improved sequentially. Even though we were lower revenue sequential than a strong fourth quarter, we were able to improve margins.

And I think you will see a continued focus on that area. Those of you who are looking at our press releases saw that we made a significant hire in the first quarter in Steve Mercier. A strong background out of Intel Corporation. Steve is now responsible for all of our operations, manufacturing and logistics, and obviously he has hit the ground, he is running, and we look forward to seeing his results as the year moves on.

We had many significant orders in the first quarter. Some highlights you saw in our press release. North Carolina Highway Patrol, Las Vegas Metropolitan PD, San Diego, Sacramento, LA Port Police Department, etcetera. In fact, we added a total of 304 new agencies up to a total of over 12,700 agencies testing and deploying our products. We added 168 new full deployments. So we now have over 4500 agencies that have deployed TASERs to all frontline officers and make it available at least to each frontline officer. We also added 102 new agencies with TASER CAM. So we are continuing to see new agencies adopting our advanced accountability systems.

On another front in sales, we did launch our infomercial in the first quarter. In fact, that is one of the reasons that SG&A is up sequentially, because the entire production cost of the infomercial were realized in the first quarter. We were running it for about 8 weeks. We have spent about a $175,000 on media. At this point, we are seeing the revenues are exceeding our media spend, but when you include all costs, we are not yet above breakeven with the infomercial. But, when we look at it currently, it is at a minimum a very effective subsidized advertising program, because the infomercial is a fantastic way of course to educate the consumer. We also made a significant hire in the first quarter in Nick Pappas, our new VP of Marketing. Nick came out of Gateway, where he stood up gateway.com, their online ecommerce efforts. He went to Best Buy and was one of the key team members in standing up bestbuy.com. So Nick brings a lot of strong experience in marketing in general.

In ecommerce, you will see TASER really building on our e-commerce base in the latter half of this year. And of course, he is also now taking over our direct response TV efforts. At this point, we continue to test. We are using the infomercials as an opportunity to test different price points. So we are developing price sensitivity curves with a product like the TASERs, pretty revolutionary different from anything consumers have seen before. This direct response TV model gives us the ability to test messaging, to test different offers, to test price points, and really gain an understanding of the consumer outlook. What we are seeing in general is very high call volumes, at least according to the industry experts and partners we've worked with that are assisting with the media buy and the call management.

We are seeing a fairly low close rate over all. And what that means is there is a lot of interest in our products, but a lot of people feel they need to see them and touch them. It's something new they have never seen before, unlike a vacuum cleaner or something else where people have a frame of reference, which again sort of reinforces to us that the infomercial will really help as a tool to educate in a cross media promotion program that includes a strong retail component where people can go in and see the product.

Also the good news there is, as we test different programs and different backend follow-up on people that call in for the infomercial, a small movement in the close rate can take this from fundamentally a subsidized advertising program to a stand alone profit center, if we are successful in moving the needle on the close rates. So, we will continue to test and invest in the infomercial. And again, Nick is really focusing on making that a cross channel effective promotions program, not just the direct response TV component.

Back to our core business, we maintained our focus on the federal military markets and the United States Air Force has placed their order for our [flight] ship TASER X26, which is being deployed with its security forces personnel. In International sales, we are up approximately 64% over last year, and $3.0 million this year. One of the things that's interesting there, we had a significant order from a new customer, a brand new country for us. To equip its law enforcement officers with 3,000 of our price leading advanced TASER M26. We've had some questions in the marketplace about TASERs positioning, and with the X26, we've got the flagship, clearly the industry leader in technology. And with our M26, we've got a low price point model that's able to appeal to countries like this one that came from frankly a more price sensitive area of the world than perhaps other countries that might focus more on the advanced features of the X26.

So, we see this as an important validation of our product segmentation strategies. Also during the quarter, six more product liability suits were dismissed on the legal front. So now we have a total of 67, as of the end of the quarter, it's actually gone up since then. 67 wrongful death or injury suits that have been dismissed.

Importantly, if we look at the net with six suits dismissed, one new suit filed, for a net reduction of five lawsuits this quarter. And overall, our strategy is really working. We've had two lawsuits filed in the fourth quarter of '07; one lawsuit in the first quarter of '08. That's down significantly from the rate of litigation in prior years. And I would like to remind our shareholders that our strategy is based on fighting aggressively in these cases and bringing the best scientific evidence that is available. And frankly, based on the scientific evidence, it is clearly on our side. When juries and judges get the chance to see the evidence, we've had so far a perfect track record.

And on that note, I would like to remind people that we won't be perfect in the court forever. Juries are unpredictable. Some of the best litigators we've talked to have said, when you've got a water-tight, 100% bullet proof case, your chances of winning in a jury are about 70%. So I have heard some comments of people saying well, when TASERs loses a case, that's really going to be an issue. And frankly it is not. We are not basing our strategy on the fact that we have to win every single case.

You cannot build a strategy based on perfection. We will lose one guys, but when we do, remember that is why we have insurance. We do have liability insurance to cover those claims and our strategy is based on continuing to challenge these cases and defend them with world class science. So, I just put that out there so that we all have realistic expectations. Doug and his team are not super human, but they do a hell of a job.

Okay, also in the first quarter, we debuted a new relationship with one of the world's leading firearm manufacturers, Mossberg. Mossberg has developed together with us the TASER X12 Less-Lethal shotguns. It is a fully integrated less lethal platform that is optimized for our extended range electronic projectile that has a very innovative new feature we call the Radial Ammunition Key Technology, where we can actually have a 12-gauge shotgun based on Mossberg's Mil-Spec Certified platforms, where you load a lethal round into that shotgun, and it will be rejected. You will not be able to fire it. Only rounds that have the TASER ammunition key feature in the round will be accepted by the weapon.

We think that's very important for a lot of agencies that are moving to dedicated less lethal platforms. It mitigates any risk of an officer accidentally loading a lethal round. I think strategically this is very important, that Mossberg sees the importance of less lethal weapons to the future. And by partnering together, we believe we can build on both companies' strengths to continue to create new value and capabilities for our customers.

And on that same topic, I am also proud to report that we now have shipped over 1000 XREP projectiles into the field for field trials. It just happened in the past few weeks. As you'll recall, we introduced the XREP last year at our conference in August. We have gone through a very extensive pre-released testing and validation program. So they are now in field trials. And the Shockwave Area Denial System we gave you last year as well, will be going to operational field deployment this quarter.

So, historically while the first quarter is seasonably weak, we are pleased to report that past investments in research and development continue to provide a solid foundation. So we seek new opportunities to diversify our revenue base and become a global solutions provider. I will remind you that TASER is an innovation company. We are sitting on an enormous global opportunity. We have a clear lead in our space and we intend to continue to build upon our lead.

If you look back a year ago, the C2 was not yet in production, and now it's approaching 10% of our sales. They are ROI on the C2 was a very good investment. Even at current levels and we see that continuing to build as we build our retail presence throughout the year here with folks like Nick helping us to really do that. So, we are proud of the fact that we have seen continued year-over-year growth in a challenging economic environment.

Now, you have also seen increases in our research and development spending over the past quarters. And while we will continue our focus on cost controls and margin improvement, we are going to accelerate our R&D spending over the remainder of the year. We have identified a number of very exciting programs that will diversify our revenue base, moving beyond just our signature product offerings and to becoming a true solutions provider to our customers, providing significantly enhanced value and creating a long term value add relationships to increase customer lock in and recurring revenues.

We believe that now is the time for us to take bold moves to extend our technological leadership. If we look back historically in the post-9/11 world, when the economy was contracting and there was a great degree of uncertainty, TASER at that point in time focused on our R&D efforts and the result was the TASER X26. That propelled us during 2004 being the top performing stock in the world. Not to say that every time we invest in R&D we can get that kind of result, but we believe firmly this is a long-term focus in this business. We are out to be the clear market leaders' in a new market we are building worldwide for lifesaving technology. So as such, we expect incremental R&D investments of about $5 million above our current spend rate over the balance of the year to fund these new products.

So we introduced some great new technology last year with the XREP and Shockwave. Products that are now moving into the field. Stay tuned for more to come in 2008, as our strategic technology roadmap continues to unfold over the balance of the year. For those of you analysts who are going to call and want more information about our strategic roadmap, unfortunately, like everybody else you are going to have to wait. But I will tell you, I am more excited about what we are doing this year than the new technologies we rolled out last year. This is a very exciting time for the company, and I look forward to the opportunity to share more of our roadmap with you in the near future.

Dan Behrendt

Thanks Rick. I am going to now go through the results for the quarter. Sales for Q1 are $22.5 million, which as Rick indicated are up 47% or $7.2 million over the prior year. Sequentially, we did see our sales fall from the fourth quarter, but again our first quarter is typically our seasonally weakest quarter in the year and it's common for us to see degradation of sales from Q4 to Q1 in the following year.

Gross margins up $12.8 million were 56.8% of sales, which are down 1.3% from the prior year. Again, the decrease in margin was caused by increased labor and material cost, which were partially driven by a change in mix, with more of our sales coming from cartridges, C2 handles and TASER CAMs, which carry a lower margin than our TASER law enforcement devices. Cartridges, C2 devices and TASER CAMs constituted 37.6% of our sales from this quarter versus 30.8% in the first quarter of 2007.

The good news is that, as we said on the last call that we would eliminate cash discounts that curtail distributor discounts. That we would lower labor cost, while negotiating better material pricing with our suppliers. We did all that, and we continue to look for ways to lower our costs and improve our gross margins, which is why we did see the 1.4% improvement in sequential margins. We do expect to improve that as the year goes on.

We saw $347,000 increase in our indirect manufacturing expenses versus the prior year. But again, this is mostly driven by higher direct wages due to the increased headcounts, and quality manufacturing engineering materials departments as well as increased scrap expenses due to the higher level production. The variances are partially offset by a larger allocation of overhead into the inventory due to the increases in our work in process to finished good inventories compared to the March 2007 timeframe.

SG&A expenses were $9.1 million for the quarter versus $7.6 million in the prior year. The variances were driven by higher salaries and benefits of $421,000 due to increased headcount. And as we noted on our last call, higher advertising cost related to the infomercial were $643,000 this quarter with the company expensing the production cost for the infomercial of $510,000 during the quarter. The company also had increase in recruiting relocation expenses of $150,000 in the quarter, when compared to the prior year, as the company invests in the human capital needed to grow the business.

Research and development expenses were $2.1 million for the quarter, which has increased of $1.1 million over the prior year. Mostly driven by the higher salaries, $333,000, increased supply cost of $206,000, and increased outside consulting cost of $334,000 related to the new products in the pipeline. As Rick mentioned, we will be ramping up the R&D spending for the rest of 2008 in order to accelerate the introduction of these new products in the pipeline.

Income from operations were $1.55 million or 6.7% of sales. This is up $1.2 million over the prior year and the company had pre-tax income in the quarter of $2 million. Pre-tax income is up $1.1 million from the prior year due to the fall through on the higher sales. Net income for the quarter was $1.2 million or $0.02 cents per share on both the basic and diluted basis. This compares to $495,000 or $0.01 per share in the prior year.

Moving on to the balance sheet, we finished the quarter with $59.2 million of cash and investments. This is a decrease in $1.1 million from the year end balance due to the investments in inventory and property, plant, and equipment which were partially offset by lower accounts receivable balances. The increase in cash for the quarter of $1.4 million is partially the result of the change in the company's investment philosophy as more of the maturing and [called] investments were invested into cash equivalents instead of the agency securities we had previously bought due to the yield curve on those investments.

Accounts receivable of $9.2 million are down $2.4 million from the year end balance to $11.7 million due to lower sales in the first quarter of 2008 versus the fourth quarter of '07. Our day sales outstanding for the quarter was 37.5 days, which is up about two days from the year end balances, but this was expected due to the elimination of the cash discount in the first quarter.

Inventory of $18 million is up $4.5 million from the year-end balance of $13.5 million. As the company has invested in more inventory support they anticipate a higher sales level. We increased raw materials to support the C2 line by $2 million and increased finished goods and top level assemblies by over $2 million related to the X26 and C2 product lines. We will continue to evaluate our inventory mix and inventory levels as we move forward in the year.

Prepaids and other assets at $2.5 million are down $1.8 million from the year end balance due to a reduction in other receivables from our insurance carrier, $720,000 in decreases in the prepaid advertising as we expensed our infomercial as I mentioned earlier at $510,000.

Current assets are $95.6 million. This is down $878,000 from the prior year, mostly driven by the decreases in AR and short-term investments, partially offset by the higher inventory values. Long term investments stayed flat at $9 million and property, plant, and equipment increased $1.1 million to $24.7 million due to progress payments for the new automated production equipment and increases in IT assets. The total invested for the automation project at this point is $3.5 million. Total assets finished the period at $138.1 million.

Moving on to the liability side of the balance sheet, accounts payable and accrued liabilities at $7.7 million are down $2.4 million from the prior year end. This is driven by the accrual we had at the year end for the second installment of the automation equipment at $1.2 million, which was paid in the first quarter, and the timing of some check runs in Q1 versus the end of the year. Current deferred revenue of $1.8 million is up from the prior year end balance of $1.7 million due to the sales of more extended warranties in 2008. Current liabilities are $10.5 million. This is reduction of $2.3 million, again driven mostly by the reduction in accounts payable. Total liabilities are $14.9 million and the company finished the quarter with $122.3 million stockholders' equity.

Moving on to the cash flow information that's provided. The company had operating cash generation of $659,000 in Q1. This is compared to a cash usage of $5.5 million in the prior year. The increase versus the prior year is driven by the higher net income and the $8 million final payment of shareholder [inaudible] in Q1 of 2007.

Net cash provided by investing activities was $587,000 for the quarter as the company realized $2.5 million from maturing and called investments, which were partially offset by the $1.8 million in new property and equipment purchases. The company generated $171,000 in financing activities, mostly driven by stock option exercises during the year, and the company ended the period with $50.2 million of cash, which is up again 1.4 million from the prior year.

Some key statistics that we typically give out on the call here. We had unit sales of the X26 of 14,092. We sold 4,278 M26, and this is up sharply from the typical run rate of the M26, again due to that international order that Rick spoke of earlier of 3,000 of the M26 product.

C2 sales for the quarter were 7,774 units. Again, we feel pretty good about the progress on the C2. We enjoyed a 5,600 unit backlog moving into Q4. So for Q1 to sell the 7,774 without that backlog, I think indicates that there is some growing demand for that product and we do feel good as we round out our distribution network there and we will see some improvements as we move through the year. Cartridges for the quarter were 304,728 cartridges and we saw a ratio of cartridges to handles of 18:1.

And with that I will turn the call back over Rick Smith, your CEO.

Rick Smith

Great. Well, we are going to go to Q&A in just a moment here, but before we do, I would like to end by inviting folks to come out and join us. Our annual meeting will be May 28, here at TASER headquarters. And as mentioned previously, we are going to be engaging in some very interesting new business this year and we will start to open the kimono a little bit at our annual shareholder meeting. So it should be an interesting time for us. For those shareholders who have been with us for a long time, we really appreciate you being with us for the ride, and we are ready to take this company to the next level.

So with that, I am going to open it up for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Steve Dyer from Craig Hallum. Please proceed.

Steve Dyer - Craig-Hallum

Morning guys. Thanks for taking my call. I'm curious as to whether you are seeing any weakness or pushback from a municipal budget issues, are you hearing sort of reductions in what you had sort of planned as for sales into some of these municipalities?

Dan Behrendt

Yes, morning Steve. We have definitely seen at least some anecdotal evidence of some municipal budgets being a little bit tighter this year than they were in prior years. We are still -- obviously, we think we have a strong value proposition, and even as these municipalities cut back, we are certainly not cutting back our sales efforts. We do think that we have got a unique product that positions us well, but we do have some -- the U.S. economy is certainly a challenge for us. Municipal budgets are a little tighter than what they have been prior years, but our plan is that the new products and new markets that we are focused on will help to offset any weakness in our U.S. law enforcement business. We still feel very good about the international business and the military, the private security, the corrections business, and some of the new products like the C2, and something like the consumer business we are hoping will offset some of that weakness in the U.S. L.E. business.

Steve Dyer - Craig-Hallum

Okay. And then I guess while we are on the topic, can you give us an update about the international business. It seems like we have had four or five different countries towards the latter stages of testing here for quite some time. Is there any break in the logjam there?

Rick Smith

Obviously we had a little bit of a break in the logjam having a new client come on with 3,000 units here in the first quarter. We continue to get very positive feedback from the more public customers like the UK and France that we have been working for years. We expect to continue to see extensions of those deployments in new countries coming online. But there is nothing today we can give you of a specific break with a large number of units that has not been already announced, but we do continue to see momentum overall.

Steve Dyer - Craig-Hallum

Are you still of the belief that one of the larger guys will come in with an order yet this year or is it too hard to say?

Rick Smith

It is really too hard to say. I mean the decision making apparatus of these large organizations is really hard to predict. We continue to get very positive feedback from the user base. By my way of thinking it is just a matter of time, but it is hard to know exactly when that will happen.

Steve Dyer - Craig-Hallum

Okay. Dan, maybe you could clarify the R&D spends. I think Rick, you had said something about incremental $5 million above and beyond sort of the current spend rate, and I just want to make sure I have that number right. So this quarter you are on about $10 million annual spend, does that imply a full year number, like $15 million or am I thinking about it wrong?

Dan Behrendt

I think we are going to see a total year number in that $13 million to $15 million range. We are definitely going to see a significant increase in the R&D spend. We think we've have got very big opportunities in front of us and we want to make sure we accelerate the R&D spend and capture that and make sure we have got the [first move] or advantages in some of these opportunities we have identified.

Steve Dyer - Craig-Hallum

Okay. I know you are somewhat limited as to what you want to say, but can you -- I mean obviously with this kind of a spend increase, is there some assurance or belief that there is some good revenue to be generated in the near to mid-term that you turn course like this?

Rick Smith

What we are spending on this year will obviously bear its fruits starting in 2009. As a management team, we have been looking very carefully at where the right places are to invest. We have had investors ask us about whether have any plans for acquisition etcetera. We do continue to look, at the make versus buy decisions on new strategic initiatives. The one we are moving into that's at the core of this spend really has to do with a more systematized approach to what has traditionally been a stand alone product business. So it does go to the core of our business. It does apply to our core markets, as well as -- like our core business with the X26, we are able to take that technology and spin it off into things like the C2 that go in to other markets.

The spend this year does a little bit of both. So we are doing some pretty innovative stuff. I will tell you this, when you see what we are doing, it has not been done before. The market research we have done -- we have had some real thought leaders in law enforcement that we have queried about this that have -- they slack jawed frankly when they saw the audacity of what we are doing. And it is not cheap. This is one of the biggest programs we have engaged upon, but we are very excited and it is not just exciting technologically. The business model shift has significant implications for increased revenue, increased revenue consistency, and increased recurring revenues as our business model expands again from being a sort of product provider today to integrating those products together into more global solutions.

Steve Dyer - Craig-Hallum

Okay that is helpful. And then my final question and I will hop back in. Looking back to the start of the quarter, would you say that the performance in the metrics this quarter were in line with your expectations, if not, where was the change or the short fall?

Dan Behrendt

I think as far as the metrics we look at for the business, certain things we are very pleased with. Again, we talked about on the last call some of the activities that were in effect to improve gross margins. We are very pleased with the improved gross margins. Especially considering that the sales are down. It is a challenge given the amount of fixed costs in the business to increase margins on lower sales and certainly we feel very good about those metrics.

From a sales perspective, again we are working very diligently on our core U.S. business, but we are also focused on -- we have made the key hires that we talked about before our market makers in the corrections, private security, consumer businesses. So, we are trying to broaden our product offerings and our market offerings here to make sure we have got lots of irons in the fire here to help grow this business longer term.

Steve Dyer - Craig-Hallum

Okay. So I guess I am reading between the lines. Sales maybe were a little bit disappointing relative to what you expected. Is it safe to say that it's kind of the domestic law enforcement arena that is slowed here?

Dan Behrendt

Definitely the U.S. LE business has definitely been a little bit of a disappointment, but it's one of those things that we still think we have a strong value proposition there are and we are just making sure that redouble our efforts to make sure we get business that is out there.

Rick Smith

You know, just to elaborate on that, state and municipal budgets are largely driven by sales tax revenues and property tax revenues. With what has been going on in the housing market, whether we have seen real budgetary impacts in terms of tax collections, certainly we have been hearing from our customers that there is some concern about where the budgets will be in total this year. So I think we have seen some belt tightening.

Steve Dyer - Craig-Hallum

Ok great. Thanks guys.

Operator

And the next question comes from the line of Paul Coster. Please proceed.

Paul Coster - JPMorgan

Of the 7,000 or 8,000 C2 units that you shipped this quarter, how many of them were sold through versus going in the channel. Can you give us sort of sense of channel build here?

Dan Behrendt

I think the good news is that I think we did not announce a lot of new retail partners during the quarter. So most of that 7,000 almost 8,000 units are really -- I think represent the sell-through versus a pipeline fill. We continue to add retailers, but if you look at the fourth quarter with the backlog of 5,700 units, a lot of that were new customers and sort of pipeline filled whereas this quarter I think is more indicative of sell-through.

Rick Smith

I would also say that we have seen a significant uptick in the sell-through, through our website. To be honest, our current website -- we sort of make it challenging. We make sure people really want to buy a C2. I say that jokingly that with Nick coming on Board we are going to be streamlining some of our E-commerce and our web store, and some those initiatives over the next couple of quarters. And so far we have done very little promotions in e-commerce. Most of our sales direct have been folks that have learned of us in the offline world then gone online to research it. We will be bringing up world class e-commerce affiliate programs and other marketing programs this year to really drive that. But my inclination is that fourth quarter I think you can characterize is a fair amount of channel fill. First quarter in my way of thinking, it is mostly sell through.

Paul Coster - JPMorgan

Great. And presumably as the e-commerce program develops you are going to see better margins out of that as well.

Rick Smith

That certainly would be our intentions.

Paul Coster - JPMorgan

Just going back to the state and local business for a moment, this is a slight disappointment, so in the first quarter, have you witnessed something like this previously in your history? Is there any sort of lessons we can learn from the past here?

Rick Smith

Well the first lesson would actually be the quarter a year ago, we saw a similar decline from the fourth quarter to the first quarter, and people looking at street expectations relative to actual results, I think last year was a greater disparity. So we are looking at it as well, trying to determine how much of this is seasonality versus how much of this is some of the budget tightening. Again from the big picture to look at nearly 50% year over year growth, we can't be too disappointed, but we just need to make sure that continue to execute and build our upward trajectory over the course of the year.

Paul Coster - JPMorgan

Okay, at this point in the quarter, do you feel like you have some kind of spring back in the second quarter?

Rick Smith

Yes, it is really too early to say, because for a number of reasons, not the least of which is, generally our quotas tend to be back-end loaded. Particularly the second quarter, because the end of June tends to be a lot of year end budget dollars. So, we will do traditionally over half our business when the second quarter comes in June. So regardless, we would never really be in a position in April to have much of an indicator on how the second quarter is going to turn out.

Paul Coster - JPMorgan

Okay. The new initiatives that you talked about, you have expressed this notion of being a solutions provider. Many of us as we think of solutions think of a lot of margin service business that kind of compliments an otherwise high margin product business. Is that just kind of erroneous thinking? Can you just give us some reassurance about the nature of the business model at the end of this transition?

Rick Smith

Yes. I would say that is an erroneous assumption as it applies to what we are doing. The businesses we are going into we believe will sustain a high margin type of infrastructure. That is not us turning into a systems integrator, and having a bunch of installers go out to the field and earning incremental revenue on a large base of revenue, or people. It's consistent with our focus on high margin, non-commodity revenues streams.

Dan Behrendt

A very high value proposition. So again, we think we will able to command pricing for that to continue to see a strong margin in that part of the business.

Paul Coster - JPMorgan

And it's enabled by technology not just by feel on the street?

Rick Smith

Absolutely. It is a very strong technology plate. That is why you are seeing the level of investment required to support it.

Paul Coster - JPMorgan

Thanks very much.

Rick Smith

Thank you

Operator

We have no further questions. I would now like to turn the call back over to Mr. Rick Smith, for closing remarks. Please proceed.

Rick Smith

Great. Well, we appreciate everyone tuning in to the conference call this morning. Again, we would invite everyone to come out to our annual meeting on May 28 and learn a little more about what we have been foreshadowing this morning, and look forward to another great year and the opportunity to continue to take our technology to the next level. Thanks everyone and have a wonderful day.

Operator

This concludes the presentation for today ladies and gentlemen, you may now disconnect. Have a wonderful day.

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